Here We Go Again

As if it wasn’t bad enough that we suffered through one government induced housing bubble and then burst – we’re back at it:

WASHINGTON, DC – Today, Fannie Mae (FNMA/OTC) announced an option for qualified first-time homebuyers that will allow for a down payment as low as three percent. Building upon Fannie Mae’s successful lower down payment program offered through state Housing Finance Agencies, the 97 percent loan-to-value ratio (LTV) option will expand access to credit for qualified first-time homebuyers that may not have the resources for a larger down payment. These loans will meet Fannie Mae’s usual eligibility requirements, including underwriting, income documentation and risk management standards. These loans will require private mortgage insurance or other risk sharing, as is required on purchase loans acquired by the company with greater than 80 percent LTV.

“Our goal is to help additional qualified borrowers gain access to mortgages,” said Andrew Bon Salle, Fannie Mae Executive Vice President for Single Family Underwriting, Pricing and Capital Markets. “This option alone will not solve all the challenges around access to credit. Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage. We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers.”

Just as before, political pressure to move unqualified borrowers into homes is too much to resist.

7 responses to “Here We Go Again”

Except, of course, the housing bubble was primarily middle and upper income people buying homes beyond their means, often speculative, due to the high demand by big banks for mortgages to pack into their unregulated derivative bond markets. If it were just sub prime loans and the poor, it would have never caused such a speculative boom or bubble. That was a private sector creation. This has no risk of doing that, as long as the big banks don’t repeat their behavior.

Except, of course, the housing bubble was primarily middle and upper income people buying homes beyond their means, often speculative, due to the high demand by big banks for mortgages to pack into their unregulated derivative bond markets.

We crashed due to the subprime loans:

“There is very little doubt that the underlying cause of the current credit crisis was a housing bubble. But the collapse of the bubble would not have led to a worldwide recession and credit crisis if almost 40% of all U.S. mortgages–25 million loans–were not of the low quality known as subprime or Alt-A.

These loans were made to borrowers with blemished credit, or involved low or no down payments, negative amortization and limited documentation of income. The loans’ unprecedentedly high rates of default are what is driving down housing prices and weakening the financial system.

***

…the Community Reinvestment Act. New CRA regulations in 1995 required banks to demonstrate that they were making mortgage loans to underserved communities, which inevitably included borrowers whose credit standing did not qualify them for a conventional mortgage loan.

To meet this new requirement, insured banks–like the GSEs–had to reduce the quality of the mortgages they would make or acquire. As the enforcers of CRA, the regulators themselves were co-opted into this process, approving lending practices that they would otherwise have scorned. The erosion of traditional mortgage standards had begun.

Shortly after these new mandates went into effect, the nation’s homeownership rate–which had remained at about 64% since 1982–began to rise, increasing 3.3% from 64.2% in 1994 to 67.5% in 2000 under President Clinton, and an additional 1.7% during the Bush administration, before declining in 2007 to 67.8%. There is no reasonable explanation for this sudden spurt, other than a major change in the standards for granting a mortgage or a large increase in the amount of low-cost funding available for mortgages. The data suggest that it was both.

As might be expected, the market for subprime and Alt-A loans grew along with the rise in homeownership. Some have argued that unregulated groups such as mortgage brokers and bankers, working with subprime lenders such as Countrywide Financial, supplied both the easier credit and the lower loan standards, but the facts belie this.”

When you borrow money to people who can’t pay it back – you invite trouble.

“As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages. Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government.”

Your story is out of date — the next sub-prime crisis is already here: F&F are out of cash and sitting on $5 Trillion in sub-garbage loans. The banks learned their lesson; they aren’t touching sub-primes in a ZIRP environment.

Everyone who matters agrees that F&F need to be dismantled, and that the entire practice of foisting houses upon those who can’t afford them should have already come to an end, but the political pressure is too great. Brace yourself for more chatter over bailouts.

I see a bigger problem, that there’s no new industry or economic catalyst (ex: low interest rates, new tech, etc.) to try and drive any sort of economic boom. I’ve been in a number of companies in a number of industries and while there’s recovery, I don’t see a heck of a lot of growth, or speculative investment growth.

Overall, it’s my opinion that because of that we’re simply in another round of musical chairs where once the money stops (again), there’s going to be a lot of people getting screwed (again), and we’ll be talking bailout (again).

What’s putting lower-income people into houses in the meantime going to do, anyways? With so much inventory these houses likely won’t be getting built so no construction boom like we had when interest rates dropped or when the first subprime wave hit. Therefore to me, the only people to really benefit will be the banks and mortgage/real estate brokers. What good will that ultimately do the economy? Brokers can’t carry an economy and the banks will just sit on more of the cash anyways – they’re still puckered up tighter than a snare drum and haven’t been lending anywhere near to the levels that they used to, even for “safe” loans. (I don’t have hard data on that, that’s just been my experience in talking with small and medium-sized businesses. The banks have taken a more “Canadian Bank” position which is that they won’t lend you money unless you don’t need it.)

There’s a book out there called, “Aftershock” – it’s a great book that talks about past and future bubbles, if anyone is interested.

New houses are not likely to bubble anytime soon. There are still not enough buyers. There are a lot of existing homes falling into disrepair. Many of them are from elderly owners passing on or into nursing homes. At some point these existing homes will find newer and younger owners. A renovation bubble is maybe in the cards, hopefully.